Strong U.S. jobs report could see Fed tapering QE early

Today, good news about the economy was actually good for the financial markets. Though that’s not the way things have played out recently.

The greatest part of Friday’s employment report wasn’t the fact that 203,000 new jobs were created in November. Or that the unemployment rate had an unbelievable (some may say not believable) decline, from 7.3 percent to 7 percent.

No, the most astounding — and perplexing — thing about it all was that interest rates barely reacted to the better-than-expected report.

Stock prices rose sharply on the employment news, with the Dow Jones industrial average closing at 16,020.20, up 198.69 points.

But everyone on Wall Street understands that the bond market is smarter than the stock market.

Interest rates have been rising sharply for months, with the 10-year US government bond reaching 2.87 percent earlier this week. The smart money on Wall Street was worried that a strong-ish employment report — like the one we got — would have easily sent interest rates on that security up to the 3 percent level, and in fact they did touch 2.9 percent briefly after the announcement.

Why? First, because a stronger economy increases the demand for borrowing. And that allows lenders to charge more for money.

But the chief reason that people expected an increase in rates is that an optimistic employment report might give the Federal Reserve the excuse it has been looking for to scale back on its disastrous Quantitative Easing bond-buying program when it meets later this month.

The November numbers follow an October jobs report that showed a gain of 200,000, which was revised down slightly from 204,000. Even if both prove in the months ahead to be anomalies, they just might give Ben Bernanke and his gang the opportunity to start scaling back on QE.

I’d still bet that the Fed won’t have the nerve to actually cut the size of its bond and mortgage purchases but will, instead, simply start pounding its chest about future QE taperings.

For one thing, the Fed has continued to say that its own research indicates that the economy is expanding only moderately. And economists at the Fed, probably better than anyone, know that there are month-to-month quirks in all economic data.

Take this quirk, for instance: Even though last month’s job growth was better than expected at 203,000, it was still well below the 247,000 jobs created in November 2012.

So these boosts could simply be some upward seasonal bias that is occurring during all Novembers.

And the 203,000 increase could actually mean, comparatively, that it was considerably weaker than November 2012’s.

You have my permission to say “hip, hip” about the employment report, but you might want to delay the “hooray” for a while.

Still, being shy just 1.2 million jobs is better than the 8.7 million job shortfall back in February 2010.